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Elasticity…..how much do consumer’s react?

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Presentation on theme: "Elasticity…..how much do consumer’s react?"— Presentation transcript:

1 Elasticity…..how much do consumer’s react?

2 The concept of elasticity
Intro to Elasticity The concept of elasticity Has the London congestion charge reduced traffic flows and congestion? Will most people still fly if there is a new aviation fuel tax?

3 Price elasticity of demand
Intro to Elasticity Price elasticity of demand Why is elasticity of demand important for Stelios?

4 Intro to Elasticity Elasticity of Demand Why do hotels lower room-rates at weekends and why do car rental firms charge lower prices at weekend?

5 Cut-throat competition?
Intro to Elasticity Cut-throat competition? Gillette – the manufacturers of the Mach 3 razor - controls over 70 per cent of the world's wet shave razor market and takes 90 per cent of the $1.5 billion annual global profits If the price of Mach3 razors went up by 20% - would you still buy them?

6 By how much does demand fall?
Elasticity – the concept Elasticity is the responsiveness of one variable to changes in another E.g. When price rises what happens to demand? BUT…. By how much does demand fall? Demand falls

7 Elasticity – the concept
If price rises by 10% - what happens to demand? We know demand will fall By more than 10%? By less than 10%? Elasticity measures the extent to which demand will change Elastic Inelastic

8 There are 4 types of elasticity
Price elasticity of demand Price elasticity of supply Income elasticity of demand Cross elasticity We will cover these over the next 3 weeks!

9 Price Elasticity of Demand
Intro to Elasticity AS Economics Price Elasticity of Demand

10 They all have differing levels of elasticity
The demand curve can be a range of shapes each of which is associated with a different relationship between price and the quantity demanded. Price (£) They all have differing levels of elasticity Quantity Demanded

11 Elastic V Inelastic Price Elasticity of Demand
Intro to Elasticity Elastic V Inelastic Price Elasticity of Demand The responsiveness of demand to changes in price Where % change in demand is greater than % change in price – elastic Where % change in demand is less than % change in price - inelastic

12 To your work sheet & Calculators!

13 Your worksheet…. Use a calculator!
Question % change in Price % change in Qty Demanded Elasticity Type of elasticity A 10 20 =20/10 = B 50 25 =25/50 = C 7 28 D 9 3 E 5 F 60 G 8 4 H I J 11 K 15 % change in D > % change in P = elastic % change in D < % change in P = inelastic

14 % change in Qty Demanded
The ANSWERS… Question % change in Price % change in Qty Demanded Elasticity Type of elasticity A 10 20 =20/10 = 2 Elastic B 50 25 =25/50 = 0.5 Inelastic C 7 28 4 D 9 3 0.33 E 5 2 F 60 G 8 0.5 H 1 ??? I 0.71 J 11 0.73 K 15 What do you notice about the numbers and the type of elasticity? UNITARY PERFECT INELASTIC

15 Elasticity The Formula: % Change in Quantity Demanded
___________________________ Ped = % Change in Price If answer is between 0 and -1: the relationship is inelastic If the answer is between -1 and infinity: the relationship is elastic Note: PED has – sign in front of it; because as price rises demand falls and vice-versa (inverse relationship between price and demand)

16 Values for elasticity of demand
Intro to Elasticity Values for elasticity of demand If Ped = 0 then demand is perfectly inelastic - demand does not change when the price changes If Ped is between 0 and 1 then demand is inelastic If Ped = 1 then demand is said to unit elastic If Ped > 1, then demand responds more than proportionately to a change in price – i.e. demand is elastic Elasticity of demand measures the responsiveness of demand to changes in price Where the % change in demand is greater than % change in price – demand is elastic Where the % change in demand is less than % change in price – demand is inelastic

17 Elasticity through Demand curves

18 Intro to Elasticity An inelastic demand Price Quantity Demanded

19 An inelastic demand Price £200 400 Quantity Demanded
Intro to Elasticity An inelastic demand Price £200 400 Quantity Demanded

20 An inelastic demand Price Total revenue = price x quantity = £80,000
Intro to Elasticity An inelastic demand Price Total revenue = price x quantity = £80,000 £200 400 Quantity Demanded

21 An inelastic demand Price Total revenue = price x quantity £400
Intro to Elasticity An inelastic demand Price Total revenue = price x quantity £400 = £140,000 £200 350 400 Quantity Demanded

22 An inelastic demand Price % change in demand = £400
Intro to Elasticity An inelastic demand Price % change in demand = Was 350 and is now 400 = 50 / 350 x 100 = 0.14 x 100 = 14% £400 £200 350 400 Quantity Demanded

23 An inelastic demand Price % change in demand = 14% % change in price =
Intro to Elasticity An inelastic demand Price % change in demand = 14% % change in price = £200 - £400 = 200/200 = 1 1x100 = 100% change in price £400 £200 350 400 Quantity Demanded

24 An inelastic demand Price % change in demand = 14%
Intro to Elasticity An inelastic demand Price % change in demand = 14% % change in price = 100% Price elasticity of demand = 14 / 100.0 =0.14 (inelastic) £400 £200 350 400 Quantity Demanded

25 An elastic demand curve
Intro to Elasticity An elastic demand curve Price £200 400 Quantity Demanded

26 An elastic demand curve
Intro to Elasticity An elastic demand curve Price £200 £100 400 1200

27 An elastic demand curve
Intro to Elasticity An elastic demand curve Price Total revenue when price = £200 = £200 £100 400 1200

28 An elastic demand curve
Intro to Elasticity An elastic demand curve Price Total revenue when price = £200 = £80,000 £200 £100 400 1200

29 An elastic demand curve
Intro to Elasticity An elastic demand curve Price Total revenue when price = £200 = £80,000 Total revenue when price = £100 = £120,000 £200 £100 400 1200

30 An elastic demand curve
Intro to Elasticity An elastic demand curve Price Price elasticity of demand % change in demand = % change in price = £200 £100 400 1200

31 An elastic demand curve
Intro to Elasticity An elastic demand curve Price Price elasticity of demand % change in demand = 200% % change in price = 100% Formula = 200 100 £200 £100 400 1200

32 An elastic demand curve
Intro to Elasticity An elastic demand curve Price Price elasticity of demand = -2 (elastic) % change in demand = 200% % change in price = 100% £200 £100 400 1200

33 Perfectly inelastic demand curve
Intro to Elasticity Perfectly inelastic demand curve Price £400 £300 £200 600 Quantity Demanded

34 Perfectly elastic demand curve
Intro to Elasticity Perfectly elastic demand curve Price £200 400 1200

35 Your go again… Elastic = customers will react more to a change in price Inelastic = customers will react less to a change in price

36 Elastic or inelastic demand?
Intro to Elasticity Elastic or inelastic demand? What would happen to demand if prices went up by 25%? A Sony portable PlayStation Household electricity

37 Elastic or inelastic demand?
Intro to Elasticity Elastic or inelastic demand? A tall latte from Costa Coffee from a railway station vendor A pound of pork sausages from a local market

38 Elastic or inelastic demand?
Intro to Elasticity Elastic or inelastic demand? Precision steel used in the construction of new office developments A new kitchen bought from B&Q

39 Elasticity Questions…are these products Price Elastic or Inelastic?
Gateway cuts the price of their desktop PCs by 10% A fall in the price of Euro-star tickets An increase in the price of the Financial Times A taxi home from a night-club on a Friday night A rise in average car insurance premiums Motorway petrol prices rise by 5% after the budget Vodafone cuts their mobile phone charges The price of central heating oil rises by 20% due to a rise in world oil prices A local leisure club decreases monthly charges by 15% in a bid to increase the number of members

40 Homework….

41 Homework CD Textbook p45 – 50 Read up on Elasticity of Demand.

42 Plenary - Elastic or Inelastic ?
Price increase by 10% and demand falls by 30%... Price elasticity of demand is ?????? Elastic

43 Plenary - Elastic or Inelastic ?
Price increase by 10% and demand falls by 8%..... Price elasticity of demand is ?????? Inelastic

44 Plenary - Elastic or Inelastic ?
Price increase by 10% and demand falls by 10%... Price elasticity of demand is ?????? Unitary Elastic

45 Plenary - Elastic or Inelastic ?
Price increase by 10% and demand falls by 0%... Price elasticity of demand is ?????? Perfectly Inelastic

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